Tuesday, May 10, 2011

This morning the BLS reported that April imported goods prices were 11.1% higher than a year ago. Excluding petroleum, import prices were up 4.3% year over year. So it's not just oil prices that are moving up, it's all prices. And the common denominator behind all imported goods prices is the dollar, whose value has been declining since 2002.

The two charts above tell the story. The top chart shows an index (nsa) of all imported goods prices ex-petroleum. The bottom chart is a popular measure of the dollar's value against other currencies. Note how the two lines tend to move in opposite directions: the rising value of the dollar from 1995 through 2002 corresponded to a decline in imported goods prices; while the falling dollar from 2002 on has seen a substantial rise in imported goods prices.

This simply illustrates the obvious fact that a weak currency inevitable results in more inflation. If the dollar were to continue to decline, then imported goods prices would continue to rise and eventually all prices would rise.

If we wish to have a core CPI at the target 2 percent, the Fed should ease up on the money supply, or engage in QE3.

I just don't understand the current mania for extremely low inflation rates. The USA economy thrived through the 1980s and 1990s with moderate inflation rates, but higher than those of now. And we are climbing out of a recession now--higher inflation should be tolerable now, in exchange for real growth. And we have been below target inflation rates for three years--we have ground to make up.

The 'mania' for low interest rates have been generated by our fearless political leadership (both parties) who have saddled the treasury with a $15T deficit - and cannot handle interest rates any more than zero!

Raise rates to a 'normal' 5 percent and see how fast the economy slips back into a double dip nightmare!It will make ")& look like a walk in the park!